Overseas acquisitions alluring for U.S. drug companies

May 13, 2014 11:37 PM

By Len Boselovic and Patricia Sabatini / Pittsburgh Post-Gazette

Mylan Inc.'s plans to find a major acquisition by year end could spark the same outrage unleashed by Pfizer's intent to slash its U.S. tax bill by buying British drug maker AstraZeneca and reincorporating in the United Kingdom, where the tax rate is lower.

So far, Mylan has been jilted in its pursuit of Swedish drug maker Meda. Heather Bresch, CEO of Cecil-based Mylan, said lowering the generic drug maker's U.S. tax bill would not be the primary reason for acquiring Meda or any other foreign company. But it "may be a byproduct" of any deal, she told analysts during a conference call this month.

Other drug makers are pursuing the same strategy, and Mylan said it has to remain competitive.

"The loser in this is our country," Ms. Bresch, whose father is U.S. Sen. Joe Manchin, D-W.Va., told Bloomberg recently. "No one seems to care about that. Congress can't find it within themselves to make our country competitive."

Tax rules allow U.S. companies that merge with foreign companies to move their headquarters to lower-tax countries for tax purposes as long as shareholders of the foreign company own at least 20 percent of the merged company. In most cases, the shift, known in accounting circles as an inversion, does not mean a company relocates its actual headquarters overseas.

"It's not meaningfully affecting the way they do business at all. It's just a tax dodge," said Matt Gardner of Citizens for Tax Justice, a Washington, D.C., group that advocates tax policy.

Companies want to take advantage of inversion rules because of the 35 percent tax the U.S. imposes on corporate profits, which is significantly higher than rates levied by other countries. While deductions, credits and other provisions in the complex U.S. tax code frequently enable U.S. companies to pay well below the 35 percent rate, business groups complain companies are at a disadvantage.

President Barack Obama is proposing to lower the corporate tax rate to 28 percent, but eliminate provisions companies use to lower their effective tax rate. He's also proposing changes that would make it harder for companies to do what Mylan, Pfizer and other companies could have in mind.

With political pressure mounting, Democratic senators Carl Levin of Michigan and Ron Wyden of Oregon, chairman of the Senate Finance Committee, are expected to introduce legislation this week aimed at making it harder for companies to reincorporate abroad for tax reasons.

The bill would increase to 50 percent, from 20 percent, the amount of stock a foreign company must own after merging with a U.S. company for an inversion to take place. The change would be retroactive to May 8.

"It's become increasingly clear that a loophole in our tax laws allowing these inversions threatens to devastate federal tax receipts. We have to close that loophole," Mr. Levin said in a statement last week.

Sen. Richard Blumenthal, D-Conn., said he is floating his own proposal. He said it would be premature to provide details, but that any changes to the tax code require a comprehensive approach. Threats from companies like Pfizer anger lawmakers and inspire them to act, Mr. Blumenthal said.

"Here's a great American company, an icon in the industry, absconding its citizenship," he said.

Another Democrat, Sen. Sherrod Brown of Ohio, said he backs a plan to "lower the corporate tax rate, close tax havens, and remove incentives to shift profits and jobs abroad."

"When a company uses our broken tax law to shift profits overseas, it gets an unfair advantage over American companies doing right by their workers and by American taxpayers. We need corporate tax reform now and stronger anti-inversion rules to stop transactions of this kind," he stated.

Mr. Manchin did not respond Tuesday to a request for comment.

Pennsylvania's Democratic Sen. Bob Casey said he is willing to look at reducing the tax rate and closing loopholes in order to simplify the tax code.

"We need to have a serious conversation about tax reform, but we're a long way from a consensus on how to move forward," Mr. Casey said.

Republican senators such as Pennsylvania's Pat Toomey support lowering the corporate tax rate, something pharmaceutical makers and other companies are backing. Mr. Toomey said the time to act is now, not before companies like Mylan go overseas.

"There's no question in my mind we are already forgoing a lot of growth in jobs in a lot of industries," he said.

Today's rules governing inversions were implemented about a decade ago after Tyco, Stanley Works and other companies moved their headquarters for tax purposes to tax havens.

Before the new rules, "You could do a self inversion," said Robert Willens, an independent tax adviser based in New York City. "You could just create a company, say in Bermuda, and have the Bermuda company acquire the U.S. company ... and you would be inverted."

Imposing the minimum 20 percent ownership requirement made companies looking to relocate for tax purposes find a foreign company that made sense to acquire from a business standpoint; was valuable enough to meet the 20 percent ownership standard; and was located in a country that had a lower tax rate than the United States.

"These deals are not done just for tax reasons. They are done for business reasons. If you can combine corporate synergies with tax savings, it's the icing on the cake," said Patrick Cox, a tax attorney with Withers LLP in New York.

New York-based Pfizer's plans have raised the hackles of critics who say U.S. companies should be paying more taxes. A Citizens for Tax Justice analysis of Fortune 500 companies that have been consistently profitable over the past five years indicates that while the tax law sets a 35 percent rate, tax code provisions enable companies to reduce their effective tax rate to 19.4 percent.

A post on the organization's website knocks Pzifer for wanting to renounce its U.S. tax citizenship even though it received $4.4 billion in federal contracts and benefited from taxpayer-funded research performed by the National Institutes of Health.

Department of Veterans Affairs records indicate that Mylan has received four contracts from the agency since 2009 that have a total estimated value of nearly $3 billion.

With a number of Mylan's rivals, most notably Actavis Inc., having already undergone inversions, "The feeling is Mylan as a competitive matter doesn't have a choice," Mr. Willens said. "Everybody expects Mylan to be the next company to do [an inversion]."

Mylan Tuesday did not respond to emails or a phone call seeking comment.

Actavis reincorporated in Dublin, Ireland, when it purchased Warner Chilcott in 2013. The move lowered the company's tax bill, but Actavis remained firmly planted at home, with its Parsippany, N.J., headquarters remaining the center of operations and most of its employees staying in the United States.

Mr. Willens said it may be too late for Mylan to make a similar move.

"Pfizer may have ruined the whole thing. It may have ruined the party," he said.

Mr. Obama's proposal would add another requirement besides the 50 percent ownership standard. He is proposing that companies be allowed to relocate for tax purposes only if a company's decision makers move to the country where the company seeks the tax haven.

"The visibility of this issue has snowballed," Mr. Gardner of Citizens for Tax Justice said. "This is absolutely an issue right now because of Pfizer."

But there are doubts that the solutions being proposed by Mr. Obama, Mr. Wyden and others will translate into action.

"I think it's extremely unlikely that something happens" even next year, said Mr. Cox, adding that he believes it is "almost unthinkable" that the White House proposal will be enacted.

Although Mr. Willens said chances Mr. Wyden's bill would pass were slim unless it was part of a comprehensive tax reform package, he said uncertainty over the matter likely would have a chilling effect on inversions.

"Companies would be afraid if it were enacted, their inversions would be affected," he said. "Companies that were thinking about doing inversions probably would put a brake on their efforts."

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